Roddey Corporation is a specialty component manufacturer with idle capacity. Man

Question

Roddey Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 2,900 units of component GEE. Each unit of GEE requires 3 units of material R39 and 8 units of material I59. Data concerning these two materials follow:

Material Units in Stock Original Cost Per Unit Current Market Price Per Unit Disposal Value Per Unit
R39 340 $4.70 $4.35 $3.95
I59 23,700 $8.20 $8.05 $6.85

Material R39 is in use in many of the company's products and is routinely replenished. Material I59 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product GEE?
A) $224,605
B) $196,765
C) $228,204
D) $193,285

Explanation / Answer

Material R39 is in use in many of the company's products and is routinely replenished. USE CURRENT MARKET VALUE. Material I59 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. USE DISPOSAL VALUE.

R39: 3 units for each of * 2,900 units * $4.35 Current market value = 37,845
I59: 8 units for each of * 2,900 units * $6.85 Disposal value per unit =158,920

196,765

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